RBA boss says it's time for most Australians to get a pay rise

Reserve Bank governor Philip Lowe has urged the nation's employers to give workers a solid pay rise, saying "year after year" of poor income growth is a much larger threat to the economy than falling property prices in Sydney and Melbourne.

In testimony to a parliamentary committee that suggests the bank has set a high bar for any cuts in official interest rates, Dr Lowe backed recent increases in the minimum wage while arguing most Australians needed a large payrise to kickstart the economy.

The Reserve recently downgraded its forecasts for the economy although Dr Lowe said growth of 3 per cent, unemployment at 5 per cent and inflation at 2 per cent were still "not a bad set of numbers".

The downgrade was largely due to soft household consumption, which has stretched from discretionary retail goods to major purchases such as new vehicles.

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Dr Lowe said the slowdown in household spending was due to the lack of higher wages flowing into consumer paypackets, adding that productivity gains made across the economy over the past 5 years had not been passed on to workers.

"Since 2016, aggregate household disposable income has grown at an average rate of around 2.75 per cent per year. This is down from an average of 6 per cent over the preceding decade," he said.

"It is plausible that households have responded to this extended period of weaker income growth by progressively downgrading their spending plans. For many people, it has become harder to see the lower growth in income as just a short-term development that can be looked through."

The bank has come under some pressure to consider an interest rate cut because of the sharp drop in property prices, particularly in Sydney and Melbourne. Sydney prices have dropped 12 per cent since their peak while in Melbourne they have fallen by almost 9 per cent.

Dr Lowe said despite the falls, most homeowners were still sitting on large capital gains.

He noted that people who may have bought near the top of the market were expecting their incomes to increase much quicker than what had occurred.

While prices were edging down, they did not mean the economy was in trouble.

"I understand that these swings in housing prices are difficult for some in our community. We should, though, take some reassurance from the fact that our economy and our financial system are resilient," he said.

The RBA says house prices have not had a major impact on the broader economyCredit:Rob Homer

"This adjustment in the housing market is not expected to derail the economy."

Inflation has been failed to reach the Reserve Bank's 2-3 per cent target band for most of the past three years, even with unemployment falling. Dr Lowe said the jobless rate may have to fall to 4.5 per cent - which is not in the RBA's forecasts - to drive up inflationary pressures.

This week Westpac chief economist Bill Evans predicted the Reserve would cut rates twice this year, starting in August. Financial markets are also pencilling in a rate cut by early 2020.

However Dr Lowe made clear that it would take a major deterioration in the economy for the Reserve to consider taking rates below the current 1.5 per cent setting.

"It is also possible that the economy is softer than we expect and that progress towards our goals is limited," he said.

"If there were to be a sustained increase in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point."

Figures this week showed unemployment steady at 5 per cent with full-time employment jumping by 65,000 through January.